Steering clear of the subprime mess

Bank fund manager taps Texas Capital, Signature Bank, PrivateBancorp

By

BenjaminPimentel

SAN FRANCISCO (MarketWatch) -- Despite the uncertain future of the financial services industry, Kenneth Mertz of Emerald Advisers has faith in small banks focused on "sound banking principles" that managed to steer clear of the subprime mess.

Mertz is chief investment officer and president of the Lancaster, Pa.-based investment firm, which manages the Forward Banking & Finance Fund
HSSAX, -2.03%

Started 10 years ago, the fund focuses on small-cap financials "with a particular interest in community banks and thrifts," he said. "Smaller commercial banks are taking market share away from bigger regional competitors, and have a platform where it is more personalized service," Mertz added.

Over the 12 months through Nov. 6, the Forward fund's class-A shares have lost 21.1%, but that's better than twice the 44.4% tumble for the average financial-services sector fund, according to fund tracker Lipper Inc. Its three-year 10.9% annualized loss also tops its peers' 16.5% average yearly decline over the period.

Texas Capital Bancshares

One of his recommended stocks is Texas Capital Bancshares
TCBI, -2.88%
which offers financial services to Texas-based businesses. Mertz described Texas Capital as "a businessman's bank," which has managed to raise capital despite the nation's financial crisis.

Texas Capital is filling a critical business need during the current credit crunch, he said. "With the bigger banks have continued having problems with capital, they are seeing opportunities to take greater market share."

With the severe job cuts on Wall Street, he added, smaller banks such as Texas Capital are also able to recruit experienced loan officers and other staff.

"All the freeze-up in the capital markets has gotten the big buys worried," Mertz said. "They are drawing back their horns. At the same time, creditworthy customers need a bank to stand with them."

On Thursday, shares of Texas Capital Bancshares fell 3.1% to $16.63.

Signature Bank

Another bank that's supporting these customers, he said, is Signature Bank
SBNY, -1.81%
which serves privately owned businesses in the New York area. On its Web site, the bank said it focuses on "a group of clients who often find themselves underserved by the area's larger financial institutions."

Mertz said the recent troubles of these larger institutions have benefited Signature Bank. Young bank professionals, he said, see the institution as a good place to start at a time of great uncertainty about the future of the financial services industry.

"They have loan officers and management teams coming to them from their competitors," Mertz said. "They are seen as a place where loan officers go to work and control their destiny."

Shares of Signature Bank closed at $30.48 on Thursday, down 3.7%.

PrivateBancorp

Mertz also recommends PrivateBancorp Inc.
PVTB
another small commercial financial services company focused on small and medium-sized businesses in many major metropolitan areas, including Chicago and Atlanta.

PrivateBank has grown steadily as a middle-market player that also offers private banking services to wealthy families, "which is a good long-term business," Mertz said.

On Thursday, shares of PrivateBancorp fell 4.5% to $34.45.

Like many companies in the financial services industry, these three banking companies must navigate an increasingly uncertain economic environment, especially in such metropolitan areas as New York and Chicago, where two of them are based.

But Mertz said these small banks also serve an important need in a difficult market.

"We hear so much about businesses that can't get credit," he said. But he said there "a lot of solid community banks across the country that are willing to lend."

A key to their ability to stay afloat, he added, was their decision to steer clear of the subprime mortgage market -- even when it seemed the hot arena in the financial services industry.

"They don't go out of their expertise and they stay with sound banking principles," Mertz said. "And certainly, subprime was not a sound business model."

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